What are the Issues in M&A arising from Electricity Market Restructuring?

Abstract

The energy merger was precipitated by energy market liberalisation that was often accompanied by restructuring and privatisation putting companies into play and creating new market risks that could be internalised by merging generation and supply. Electricity mergers pose distinctive challenges for competition policy - in market definition and for modelling price impacts in markets with no storage, inelastic short-run demand and transmission constraints. The EU has taken a more relaxed approach to merger assessment than the tighter screens of FERC despite greater market concentration and is poorly placed to deal with domestic mergers that impact external energy flows. Britain in contrast has used to desire for vertical mergers as a lever to reduce horizontal market power, and the EU should take more account of mergers foreclosing options for a future more competitive single energy market, notably for horizontal mergers, where cross-border interactions are important. The paper argues that vertical (convergent) mergers between electricity and gas raise particular concerns, given current EU gas market power, exemplified by the E.On-Ruhrgas merger. The form of the Emissions Trading System amplifies these concerns.